ERISA procedures unavailable to preferred providers not within ‘beneficiary’ definition

Medical providers in contract with an insurer failed to qualify as “beneficiaries” under ERISA definition and, thus, were not entitled to procedures under ERISA concerning payments, the U.S. Court of Appeals for the Seventh Circuit ruled, reversing the lower court’s ruling.

Background. The Pennsylvania Chiropractic Association and two chiropractors, Mark Barnard and Barry A. Wahner, (collectively, the providers) had entered into “participating provider”/“network” agreements with Independence Hospital Indemnity Plan, Inc. (the insurer) as part of the preferred-provider system operated by the insurer. According to this system, patients gain access to better benefits or have lower co-payments when they receive treatment from providers that agree to accept lower reimbursements from the insurer. The insurer is billed directly and the providers are unaware of whether a patient’s coverage is part of an ERISA-governed plan.

The conflict between the parties arose after the insurer had reimbursed the providers on a fee-for-service basis, which the insurer acknowledged was an error pursuant to the terms of the agreements with the providers, and reduced future compensable service payments to the providers. The providers asserted that the insurer was obligated under ERISA Sec. 1133 to offer hearings before it could reduce the future payments. The insurer contended that the procedures specified in the contract controlled.

The federal district court determined that the providers were “beneficiaries” pursuant to ERISA, as was required to assert a claim thereunder, and ordered the insurer to follow Sec. 1133 (in addition to a Department of Labor regulation) vis-à-vis coverage and payment-level decisions under the insurance policies. The providers were also awarded damages.

ERISA definitions. Sec. 1133 requires “every employee benefit plan” to make available to each “participant” and “beneficiary” procedures that the Secretary of Labor may supplement by regulation. ERISA Sec. 1132(a)(1)(B) permits participants and beneficiaries to sue in federal court to enforce this duty.

A “participant” is an employee/former employee who seeks benefits under the plan, and a “beneficiary” is “a person designated by a participant, or by the terms of an employee benefit plan, who is or may become entitled to a benefit thereunder.”

Analysis. The Seventh Circuit held that the providers are not “participants” or “beneficiaries” pursuant to ERISA and, thus, the providers are not entitled to the procedures thereunder. As an initial matter, the appellate court clarified that the providers have “standing” because they established an injury in fact, causation, and redressability pursuant to U.S. Supreme Court precedent, but that the issue at bar was not of standing “but whether [the providers’] claim comes within the zone of interest regulated by a specific statute.”

The providers conceded that they are not “participants” under ERISA, but are “beneficiaries.” The appellate court disagreed, explaining that the providers were not designated “by a participant” or “by the terms of an employee benefit plan” and that the case at bar had no effect upon an employee benefit plans’ duties to its participants. Further, the providers’ contention that the insurer could be equated to a “plan” was incorrect, and that the U.S. Supreme Court had rejected the argument that any document related to a plan is itself a plan. Additionally, a recent decision by the Second Circuit holding that providers are not “beneficiaries” under ERISA by virtue of having a network contract with an insurer did not conflict with Seventh Circuit precedent.

Moreover, because there was not complete diversity between the parties, the federal court could not adjudicate any contract claims. Accordingly, the lower court’s judgment was reversed and the damages, injunctions, and award of attorney fees to the providers was vacated.